Finding enough money to commercialise clean technology poses a major challenge to all involved. Without it, the technology and business-model innovation needed to enable a global transformation towards a more resource-efficient and low-carbon future is tough.
Overcoming the current hurdles will require new financing options and partnerships/joint ventures. Moreover, a robust strategy and understanding the requirements of a partner or partners will be key in accessing alternative funding in the current market.
The global transformation towards a low-carbon future will require radical changes to how we produce, distribute, store, manage and consume energy.
Shifting the energy mix towards renewables, the electrification of transport, retrofitting the built environment and the development of “smart” energy infrastructure and demand management are all critical components of this transformation.
All of this depends on breakthrough clean technologies.
Total government clean-energy stimulus packages are estimated at $163billion, with the majority expected to be deployed in the market in 2010 and 2011 – with clean technology focused on efficiency, grid and renewables receiving 70%.
Despite this, cleantech companies are experiencing significant challenges in the current economic climate as they strive to attract and harness resources, talent and funding to implement their growth plans.
Commercial lenders, private-equity and finance houses continue to deploy capital selectively, therefore are likely to commit on the basis of a relationship, geography and technology that they are familiar with. This creates a particularly challenging environment for small to mid-sized developers who are seeking to either deploy or evolve new technologies.
Venture-capital funding is also difficult to obtain as, although investors may be clear as to which companies to back, they struggle to buy into the steps to an exit route.
In this present environment of limited capital availability, companies may need to secure capital from sources other than the usual haunts (that is, financial institutions or venture capital) in order to fund the growth plan.
Alternative sources of funding are likely to emerge and be used increasingly, such as new capital sources, structures, partnerships and multilaterals.
These investments may not necessarily be direct investments in the company, but might instead take the form of a joint venture or collaboration agreement.
Cleantech companies are thus exploring strategic relationships with larger companies, including multinationals that may seek an interest in the company’s intellectual property, developed products and sharing government incentives, or creating new customers or channels for their component/technology.
One option is partnering to reduce project risk and to access deep pools of development capital.
Part of the answer may be new financing and corporate partnership models that satisfy the funding requirements of a capital-intensive industry at an acceptable level of risk for investors.
In light of the near-term absence of a vibrant capital market, partnerships between young cleantech companies and large corporates are looking increasingly attractive – the balance-sheet strength, distribution assets, brand association and global reach of multinational corporations appear to be an important success factor for many cleantech companies.
The establishment of a joint venture with a corporate can provide a number of benefits to a cleantech developer. It may be a way to obtain capital to finance the expansion of the business or to provide resources for continued research and development.
It can also provide the business with technology or other business assets owned by the corporate partner and can enable the cleantech business to take advantage of the corporate joint venture’s management expertise. The cost of these benefits, of course, is that the historical owners of cleantech development must share the rewards of the joint enterprise.
From the perspective of a corporate partner, the joint venture provides an opportunity to participate in a rapidly growing start-up business, and may offer access to the developer’s technology, which might be of use in the corporate’s business. In addition, in today’s world, being green is no longer seen as just a differentiator, but rather a strategic component to remain competitive within a constantly evolving market.
A way for companies to be green may be an investment or partnership in cleantech and potentially narrow the marketplace for their technology if aligning with a customer.
Power utilities, with their big balance sheets, have an especially important role to play in helping emerging cleantech companies fund the commercialisation of their technology.
There is also a world of possibilities for partnerships outside the energy industry. Many established companies are making lateral moves to take advantage of the growth opportunities in cleantech.
Aerospace companies are developing solar-energy projects. Electronics companies are moving into solar-cell manufacturing and LED lighting and telecoms into smart grid. And big-box retailers are working to make their supply chains greener.
Across industries, everyone is seeking ways to be more innovative as consumers are increasingly seeking products and services with a cleaner and greener footprint.
There are many benefits associated with partnership. However, any business relationship should be approached with caution.
While resources can be obtained and growth accelerated through partnerships, such agreements should be evaluated carefully to ensure that intellectual rights, marketing rights and other business assets are not restricted for the future in undesired ways. In all cases, it is essential to make sure that the long-term strategic goals of a company are not limited by the short-term financial needs.
Cleantech firms need to take a number of things into consideration when seeking to commercialise their technology ideas.
Although commercialisation of cleantech is currently challenging, if a deal is appropriately structured with the right partners and a robust growth story, the company is well placed to obtain funding.
A recent survey conducted by Ernst & Young of large global companies – which attracted 308 respondents from organisations with at least $1billion in annual revenues – indicated that product quality was the most important factor in determining whether to partner with emerging companies.
Asked why planned cleantech investments were sometimes later cancelled, more than half of the respondents pointed to untested technology or poor or unclear potential return on investment.
Other factors that hinder partnerships include an unclear road map to future product or service offerings; the lack of a documented track record, and general cost pressures unrelated to a specific project.
If the technology is promising, though, being a small company with a limited balance sheet and operating history is not a huge impediment as only one-third of the respondents indicated that as a major deterrent to doing a deal.
It can be inferred from the responses that preparation is everything when emerging companies are looking to approach a large potential customer or partner. The preparation should take into consideration the risk assessment and/or pilot project that will be required.
Developing a robust strategy and understanding the requirements of a partner will be key in accessing alternative funding in the current market.
The developer will need to engage in such a way that a partner sees the value to them. In order to align your offer with a partner’s strategy, learning and understanding what value means to them will be critical.
A robust strategy should include a number of considerations – for example, early involvement of customers. Customers may be willing to fund cleantech research and development to get the product. For example, many software products were developed as part of a consulting contract.
In addition, a cleantech developer should explore the opportunity to enlist others to exploit parts of the market. For example, biotech companies such as Genentech license their new processes and drugs to major pharmaceutical companies, and Ballard Power Systems licensed its fuel-cell technology to the major automotive companies.
In the end, the new cleantech industry still needs to determine how to work with established and mature industries, even as demand, funding and political support for cleantech globally have never been higher.
Dane Wilkins is a director in Ernst & Young’s energy and environmental infrastructure advisory team
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